Comprehensive Guide to Second Mortgages

Any loan acquired for the value the home holds apart from the initial loan required to purchase the home is known as a second mortgage. Generally, second mortgages are bought to compensate for the down payment and the other cost associated with the value upliftment of the home. Even a second mortgage has to be paid back in installments every month just like how the first mortgage works.

Types of second mortgages 

The list might vary according to the loan lending rules and regulations of every single country. However, there are about three types of second mortgages. 

  • Home equity loans 
  • Home equity lines of credit 
  • Piggyback loans

Home equity loans 

These are the types of loans where you can borrow a huge sum of money all at once. 

The time allotted for repayment of the home equity loans is generally 5 to 15 years. 

The rates of Interest are either fixed in nature or can be adjustable. 

One can use up the funds are acquired from the Home equity loan for any purpose they want to. However, there are certain types of home equity loans that can be used only for specific purposes.

Home equity lines of credit 

These are the types of second mortgage loans where you can keep drawing money as and when it is required. The home equity line of credit works similar to that of a credit card provided to the home buyer to acquire money for home improvement purposes. A particular duration of time is allotted for drawing the credit as well as for repayment of the credit. The drawing period is usually about five to ten years and the repayment period is generally between 10 to 20 years. 

The home equity line of credit loans interest rates are generally adjustable, but it can be changed into a fixed rate of interest during the repayment period. One of the biggest advantages of a home equity line of credit is that it offers great financial flexibility. 

Homebuyers tend to face a lot of situations where they have to spend frequently and suddenly on home improvement. During those cases, these types of second mortgage loans come in very handy. 

Piggyback loans 

This is one of the best classifications under second mortgage loans as you can split the amount required to purchase and develop a home into two halves. Mostly the first half is used in purchasing the home and the second half is used up in renovation and reconstruction. This particular strategy leads to a lot of cost-saving.

What is the risk associated with second mortgages? 

As much as there are a lot of benefits that come along with second mortgage loans, there is an equal number of disadvantages as well. 

  • ·         Foreclosure risk 

The primary mortgage loan lender is also known as the first mortgage loan lender will be able to take the maximum amount obtained from the selling of the mortgaged property. So, there are high chances that the second mortgage loan lender might acquire your property completely as that is the only thing left. 

  • Cost for obtaining a loan 

Obtaining and repayment of the loan in itself is a huge deal. When it comes to second mortgages, the cost incurred in obtaining the loan itself can prove to be very expensive. It is recommended to think more than once before going in for a second mortgage loan. There are a whole lot of other things you need to be aware of while speaking of second mortgages. But these are some of the most important factors, you need to consider before going in for these loans. 

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